Wednesday, July 16, 2014

Treasury Secretary Jack Lew Calls for ‘Economic Patriotism’

Translation: Lew wants to squeeze more taxes out of corporations by preventing corporations from circumvent taxes via inversions. That's patriotism to Lew: grab more taxes.

Specifically, the Obama administration late Tuesday called on Congress to immediately pass legislation to block U.S.-based multinational companies from moving their headquarters overseas in order to get a lower tax rate, reports Politico.

In a letter to Senate Finance Committee Chairman Ron Wyden (D-Ore.), Lew called for a “new sense of economic patriotism” in which U.S.-based companies are no longer allowed to do “inversion” transactions only for the purposes of changing their tax domicile.

According to Davis Polk:
The typical acquisitive inversion transaction involves (i) putting a newly-formed non-U.S. holding company on top of the existing U.S. corporation, with the shareholders of the U.S. corporation becoming shareholders of the non-U.S. holding company, in conjunction with (ii) the acquisition by the non-U.S. holding company of a foreign target corporation, in a transaction in which the former shareholders of the foreign target corporation receive more than 20% of the stock of the non-U.S. holding company...
Cadwalader, Wickersham & Taft explains the tax benefits this way:
[T]he U.S. corporation...distribute[s] the untaxed earnings of its foreign subsidiaries to the shareholders of the new foreign parent, or to reduce its future tax liability through deductible payments to the new foreign parent, each without U.S. tax.
For example, in Endo Health Solutions’ 2013 acquisition of Paladin Labs, shareholders of Endo and Paladin exchanged their shares for those of a new holding company incorporated in Ireland, which will own the two companies as subsidiaries. This will allow Endo to reduce its effective tax rate from 28 percent to 20 percent, resulting in $50 million in annual tax savings.
Lew wants legislation to be retroactive to May to block such transactions. This would prevent recent inversions which have been recently proposed by such firms as U.S. drug makers Abbvie and Mylan.


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